22nd May 2001

SORP on Derivatives

Invitation to comment
Having reviewed the banking SORPs, we have concluded that the only changes needed at this stage are revisions to the Derivatives SORP to:

  • establish that credit derivatives fall within the scope;
  • provide a definition of close out costs and including a cross-reference confirming that active market participants must also take account of future costs in valuing their trading portfolios.
  • bring the disclosure recommendations of the SORP into line with FRS 13 ‘Derivatives and Other Financial Instruments: Disclosures’;
  • implement aspects of the 23 June 2000 European Commission recommendation ‘concerning disclosure of information on financial instruments and other items complementing the disclosure required according to Council Directive 86/635/EEC on the annual accounts and consolidated accounts of banks and other financial institutions’ – a fuller explanation of which is given in the letter to the DTI enclosed as the last document; and
    – to bring the definition of a bank back into line with the provisions of the Companies Act 1985.

We have not taken any account of IAS 39 ‘Financial Instruments: Measurement and Recognition’ as there are many outstanding issues concerning the application of the standard, including whether it provides an appropriate axis on which to base harmonised international accounting post-2005. Nor has any account been taken of the proposals set out in the consultation paper on the Joint Working Group’s proposals ‘Financial Instruments and Similar Items’. Both are still the subject of discussion and their relevance or otherwise to UK GAAP has not yet been established. We have also not sought to preempt the discussion taking place within the industry on the need for enhanced credit disclosures and disclosures expected to result from the consultation exercise on Pillar 3 of the revised Basel Capital Accord.

Within this context, your comments are particularly invited on the following aspects of the proposed text:

  1. Are the references to credit derivatives sufficiently clear?
  2. We have added a definition of close out costs (paragraph 41) and have clarified the valuation guidance on trading transactions (paragraphs 19-21). Is the guidance clear?
  3. Is the information concerning FRS 13 clear and helpful; do you support the additional recommendations of the SORP (paragraphs 31-35 and appendix 1)?
  4. Do you support the approach adopted in respect of the 23 June 2000 EU Recommendation? Do you agree with the proposed interpretation of maximum exposure to credit risk (paragraphs 36-37) and the proposed interpretation of potential credit risk exposure (paragraph 38)? Do you agree with the maturity analysis being based on notional principal amounts and the replacement cost (paragraph 40)? Are there any other aspects of the recommendation that you believe that the BBA should have acted upon?
  5. Do you agree with the proposed definition of a bank (paragraph 41)?
  6. Are there any other changes that you consider should be made at this time?
  7. Are there any other comments that you would care to make?

Your comments are invited – by 17 August 2001 – and should be sent by e-mail to info@bba.org.uk.

In the event that e-mail is unavailable comments can be sent by post or fax to:
Paul Chisnall
British Bankers’ Association
Pinners Hall
105 – 108 Old Broad Street
London EC2N 1EX

Fax: + 44 (0)20 7216 4365

All replies will be regarded as being on the public record unless confidentiality is specifically requested.